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Advisors Feel Pinch of Compensation Squeeze

Many advisors expect to see a slight lift in pay in 2012, but with the sluggish economic recovery, ongoing global challenges and relentless cost-cutting, there is little reason to bring out the bubbly.

Compensation expert Alan Johnson frames it this way: “Even if those stock portfolios have rebounded, the scars are still there. Clients are tired. Advisors are tired. It’s been a grind. What I tell my clients is we’re not in a recovery, we’re in a struggle. The market is better, but it’s not nearly as good as we were hoping for.”

New York City-based consultancy Johnson Associates is forecasting a 5-10% bump in compensation for advisors across channels, a downgrade from estimates early in the year.

The continuing drag on compensation comes as the wirehouses continue to cut fixed costs—many of which had helped prop up advisors. “Nickels and dimes are turning into quarters and dollars,” observes Danny Sarch, president of Leitner Sarch Consultants in White Plains, N.Y. “It’s a more subtle way, or insidious way, of taking money out of pocket.”

Wirehouses traditionally have paid the full salary for an advisor’s sales assistant—not any longer, necessarily. Some are also dinging advisors for state registration costs, assorted travel and entertainment expenses, even mobile feed fees.

“Wirehouses are starting to charge a la carte, which puts them in a bit of alignment with the independent sector,” says Alois Pirker, research director at Aite Group, an industry consulting firm in Boston. “But they’ve got to be careful. A $15 mobile fee isn’t going to be the killer, but if you do this consistently, you are going to get pushback.”

Or, as Jeff Spears, co-founder and CEO of San Francisco-based Sanctuary Wealth Services, bluntly puts it: “It’s death by a thousand cuts. In my opinion, and in the opinion of top brokers, it’s an insult to their intelligence. Years ago, when they were making $2 million a year, they were willing to look the other way. Today, with their compensation cut in half, they’re telling me that some of the things I used to not let bother me now really piss me off.”

Sanctuary, an RIA that assists breakaway brokers, produced a much talked-about white paper in June that suggests that the compensation gap between top-tier wirehouse brokers and independent advisors is closing. This year, according to the report, an elite wirehouse broker will make $905,000, not counting a recruiting bonus. That’s down from a high of nearly $2 million during the late 1990s and early 2000s. By contrast, the independent wealth advisor is expected to take home an $875,000 paycheck in 2012.

“Historically, it’s been very different. There’s always been a big discrepancy between what you can get paid on Wall Street and what you get paid as an independent,” says Spears. “The new reality in wealth management is that the glory days of volatile, multimillion dollar paydays are gone forever due to changes in client preferences. Now that it’s getting closer to parity, it’s not the issue it used to be.”

Price Adjustments

Pricing their services is always tricky for advisors—but there is some evidence that could be changing, at least at the high end.

The median asset under management fee for a portfolio of $500,000 to $1 million has remained constant at 1%, he reports. But the $2 million portfolio fee has bumped up from 80 to 88 basis points, and the fee for a $5 million portfolio has jumped from 63-65 basis points to 70.

”I think, and I’m only guessing here, that clients in the $2 million to $5 million range are increasingly demanding more higher touch services that were typically only available to the $10 million and up client,” says Inveen. “There are more exotic asset classes that require other custodial platforms, more need for insurance planning or estate planning. To some extent, it’s like what banks are doing to consumer checking account customers.”

Going forward, Inveen expects to see the asset-based fee combined at times with an event-driven or project-type fee. Some firms already are charging separate fees for financial plans. Others, he said, are instituting retainers to cover the minimum fixed costs associated with maintaining a client account, regardless of asset level.

Other nuggets from the report: Looking at revenues by source, 89% of revenues were derived from asset management fees. And, notably, the median income per owner in 2011 stood at $300,000, finally surpassing 2008 levels.

That corresponds with the recently released 2012 RIA Benchmarking Study from Charles Schwab, which showed median principal income (total compensation, bonus and firm profits per principal) at $341,000. Profits grew 14% at the median firm in 2011, mostly driven by revenue growth.

“All the indicators, from client demand to retention rates and productivity, suggest that RIA compensation levels will continue to rise,” notes Nick Georgis, vice president of Schwab Advisor Services. “This is in direct relation to the expectation of continued growth in this category overall as increasing numbers of investors move to independent advice models.”

No matter their business model, Pareto Systems co-CEO Duncan MacPherson urges advisors to disclose to clients precisely how they are paid. It is, he admits, a potentially awkward situation but it is also one he believes advisors should confront head-on.

“From the advisor’s standpoint, there’s a lot of fear of having the client focus on what you cost rather than what you are worth,” says MacPherson, who operates an advisor coaching firm near Vancouver, Canada. “A lot of advisors don’t want to bring it up for fear it might raise eyebrows. But being forthright is incredibly refreshing.”

MacPherson says advisors should use a professional “agenda-driven” format to communicate how they are compensated. A move from commissions to fees provides an obvious opportunity to have such a conversation, as does the launch of a new client relationship. “At the same time, if you’ve been my client for 10 years, I can still reframe the relationship—even if there’s no transition involved,” he adds. “Simply put it on your agenda at a review meeting as a bullet that says ‘a point of clarity.’ It doesn’t have to be difficult.”

The response from clients? Relief—and referrals.

“The more clarity I have with you and your process the easier it is for me to describe you. By taking that mystery away and giving me clarity, the next time I’m talking about you to a friend or family member, I can do it with a whole lot more conviction,” says MacPherson. “There’s none of that fuzziness about the relationship.”

A Look Ahead

The outlook for the biggest, best and brightest advisors is positive, according to pundits. Bing Waldert, a director at Boston-based Cerulli Associates, observes: “They can stay on point in times of economic uncertainty. They’re not distracted by all the noise around them.”

But without economic growth or a surge in the capital markets, Waldert predicts more cost cuts, particularly at the large brokerages that are losing market share. As one high profile example of what may be to come, Morgan Stanley Smith Barney in August reduced its number of complexes to 86 from 118 and cut the number of nonproducing managers to 85 from 150.

“These are fairly highly compensated people. The key point is fairly aggressive cost-cutting is still going on at these enterprises,” says Waldert. “To think that will filter downstream to advisor compensation wouldn’t be surprising. It’s a continuation of the same theme. Certainly, we will see underlying advisor compensation affected.”

Compensation expert Andy Tasnady, who heads Tasnady & Associates in Port Washington, N.Y., says the big wirehouse producers and teams will be insulated from the cuts because they are so valuable to their firms.

And, with the stock market putting downward pressure on trading volume, he suggests advisors engage in more handholding and an expansion of services beyond stock trading.

“There’s insurance-based products, cash-based investments, real estate, lending. Broaden your base. A lot of firms are paying on the lending side, particularly those that have been bought by banks,” he says. “If they’re not trading, you should have more time to handhold. What better time than now to do a better job reaching out to clients proactively?”